Tuesday, October 23, 2012

The 2012 Nobel Prize in Economics was awarded jointly to Alvin E. Roth and Lloyd S. Shapley "for the theory of stable allocations and the practice of market design". The Economist devotes an article to their work. I quote:

Money is not essential to a market. After all, economics is about maximising welfare, not GDP. But the absence of a price to allocate supply and demand makes it harder to know whether welfare is being maximised. This year’s Nobel prize in economics went to two scholars—Alvin Roth, who has just joined the economics department at Stanford University, and Lloyd Shapley, a retired mathematician at the University of California, Los Angeles—who have grappled with that very problem.

The term "market" is used here in the sense of an institution that matches individuals for transactions. Our monetary markets use price signals to match buyers and sellers. There is of course a long literature on the conditions under which markets result maximize welfare. In theory and in practice, there are situations in which the use of monetary signals will not work, yet we still wish to institutionalize systems to organize transactions so as to maximize welfare.

Roth and Shapely pioneered in the use of computer programs to match pairs of people for transactions in the absence of monetary signals. Programs of this kind are now used in matching donors and recipients for organ transplants, matching students with educational and training opportunities, and newly minted lawyers with opportunities to clerk with judges.